European Invasion

RUDOLF FERSCHA LIVES IN FRANKFURT, Germany, but the Eurex chief executive has become so at home in Chicago on his frequent visits that he jogs at dawn along the Lake Michigan shore.

His next big run will attract a larger audience, and will take him from Lake Shore Drive right onto turf long staked out by Chicago's venerable futures exchanges. Eurex last week said it will launch on Feb. 1 a fully electronic derivatives market, called Eurex US.

Based in Chicago, it will go head-to-head with the Chicago Board of Trade and the Chicago Mercantile Exchange. The new exchange will start trading futures on U.S. Treasury bonds and European interest-rate products, before adding a family of dollar and euro denominated futures and options.

The announcement was long anticipated but still created a buzz. Even skeptics who talked down the Eurex plan heard the bigger message: That the next year could bring accelerated change for Chicago's futures markets, which despite recent electronic embellishments are still devoted to manual trading through "open outcry" auctions on exchange floors. "Competition can be good," says Russ Wasendorf Jr., chief operating officer at Peregrine Financial Group. "That a competitor can come in shows there's room for improvement in price, clearing, and execution platform."

Among the highlights of Eurex's pitch: With the U.S. outpost, the German-Swiss exchange can straddle the clock to provide a 20-hour market. In other words, you can buy a futures contract in the Zurich morning and, if you wish, sell it just before happy hour in Manhattan. "It's a seamless passing on of order books between two platforms, with full fungibility and clearing," Ferscha told reporters in a press conference. That flexibility may not mean much day to day -- Who needs to work longer hours, as it is? -- but allows for better price discovery in unusual situations, like when news breaks after hours.

Price and profitability were flaunted. Eurex says its all-electronic process makes it efficient and lucrative, which in turn allows it to make trading cheaper for customers. Already, it promises to keep the cost of most trades below 20 cents a contract, and charge no more than 30 cents for any trade -- low fees it vows to maintain for five years. And backing up that German efficiency is some rather American democracy and opportunity: You don't need to own a seat to trade. And Eurex US is offering equity stakes to firms that want to be strategic partners.

Whether these add up to a winning edge remains to be seen. "Can volume go to Eurex as a result? I don't see why not. Will it? I don't know," says James Keller, a managing director at Pimco, which manages more than $360 billion in fixed-income assets. Still, some potential customers say they welcome the status quo shakeup. "Right now it's an old boys' club," says Tom Sosnoff, chief executive of thinkorswim Group. "This may not be good for the market makers who've enjoyed a monopoly for some time, but I think it's fantastic for the customer who wants to trade futures."

The trading floor's evolution toward a more electronic future could be sped up. "Right now, at any time, there are two markets -- one on the screen, one in the trading pit, and there's potential for fragmented liquidity," Keller says. "If Eurex comes forth with a single electronic market," one less distracted by keeping members happy and seat prices high, "it could bring to a head change that might otherwise take longer to happen."

To be sure, no one knows how the Eurex model will survive the transatlantic crossing. Its European volume growth hinges in part on its resolute control of the trading process; here in the U.S., contracts will be cleared by a clearing house in which Eurex has only a 15% share. Giving equity stakes to firms also adds a quasi-membership feel to a market trying to avoid the politics of member-owned entities.

Then there is the potential price war. Already, recent cuts have made certain CME prices more appealing, and the CBOT will lower clearing fees come January. More pricing and policy tweaks could follow, and may well be needed. The CBOT, in particular, trades many Treasury products Eurex US will start with. "It'll have to get more competitive quickly," Wasendorf says of the CBOT. "Otherwise they could be left with nothing more than the grains."

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